Understanding the Lower of Cost and Market Price Process in SAP S4 Hana
Introduction
A crucial aspect of inventory management lies within valuation, a process that ascertains the monetary worth of goods and services within a company's inventory. Among the popular valuation methods available, the "Lower of Cost and Market Price” (LCM) method remains one of the widely preferred practices in inventory accounting worldwide. Today, let's delve into how the fruitful SAP S4 Hana handles the LCM valuation method.
Understanding LCM Valuation
Before discussing its implementation in SAP S4 Hana, it's imperative to comprehend what the LCM valuation methodology entails. As the name suggests, LCM refers to valuing an inventory based on the lower amount derived either from the original cost or the current market price of your items. The central idea behind this technique is to pinpoint any potential loss incurred due to price falls in the market.
How LCM Works in SAP S4 Hana
SAP S4 Hana comprehends the market's volatility and incorporates the LCM valuation method within its Material Ledger functionality as a part of ’Actual Costing’. With this, businesses can keep track of their inventory valuation at multiple levels, ranging from the cost of goods sold (COGS) to the gross margin, thereby generating detailed and accurate financial reports.
What is Lower of Cost or Market (LCM)
Lower of cost or market (LCM) is an inventory valuation method required for companies. In the lower of cost or market inventory va Recording Lower of Cost or Market
If the market cost is lower than the cost, a write-down is necessary. The journal entry would be as follows:
Loss from the decline in inventory value Dr. XX
Inventory Cr. XX
The loss from the decline in inventory value would be reflected in the income statement and reduce net income. Inventory would be reflected in the balance sheet and reduce the value of inventory.
The journal entry for the three examples
valuation method, as the name implies, inventory is valued at the lower of original cost or market value.
- Lower of cost or market (LCM) is an inventory valuation method required for companies.
- Cost refers to the purchase cost of inventory, and market value refers to the replacement cost of inventory.
- The replacement cost cannot exceed the net realizable value or be lower than the net realizable value less a normal profit margin.
Configuring LCM in SAP S4 Hana
SAP S4 Hana's Lower Cost and Market Price (LCM) valuation method within Material Ledger functionality offers a simple, configurable process for valuing your inventory.
To configure LCM in SAP S4 Hana, users need to follow a few steps within the Material Ledger setup, such as:
- Set the Valuation Type: Users must first set the valuation type to 'LCM' within the 'Actual Costing/Material Ledger' configuration.
- Enable Material Price Change: This step involves activating the material price change setup.
- Define Valuation Areas for LCM: This allows the system to evaluate an array of criteria to determine whether a valuation area should be accounted for LCM.
- Set Up Price Determination: After defining the valuation areas, price determination must be set.
Determination of Lowest Value: Market Prices
The lowest value based on market prices should be determined. The system searches for the lowest price (or alternatively the most recent price) among the various prices stored for each material.
Login to SAP Gui and run (MRN0) Determine Lowest Value - Market Prices
Choose the Valuation Level button. In the Valuation Level dialog box that appears, select either valuation area or company code based on your requirement, and choose the Continue button.
Navigate to the "Price Comparison" section and select the "Comparison Price" button. This will open up the "Select a Comparison Price" view.
In the Switch to the "Phys. Inventory Prices" tab. Here, check both "Current Material Price" and "Mat. Price Prev. Month" boxes. Ex_section labeled "Relationship to Market Price," choose the "Lowest Val. Comparison" option.
Lastly, move to the "Valuation Alternatives" tab and select "LMP LVMP Mat. Ledger." Input the current posting period and fiscal year in the "From Posting Period” field and click "Continue."
Current status of inventory report view before Determination lowest value of market Price.
Material Master view of target material.
Navigate to the "Update Material Master" section and select the "Database Update" option. If you need to update a particular material master field or a valuation alternative with the corresponding result, select the "Update Prices" button and choose the applicable option. (Note: This step is optional and depends on your specific needs.)
In the Print List section, choose List Format. On the List Format dialog box, select the related settings and press Enter. Choose Execute to determine the lowest value.
Financial entry posted after determination of lower Market price.
Benefits of LCM in SAP S4 Hana
SAP S4 Hana’s LCM allows companies to gauge their inventory, assisting them in identifying potential losses while maintaining the most accurate and relevant financial reporting. LCM also ensures accounting principles' compliance, reducing the risk of overvaluing the company's inventory in the financial statements.
Conclusion
By incorporating the LCM method, SAP S4 Hana ensures users can maintain an accurate inventory valuation amidst market fluctuations. It provides a sound basis for meaningful financial reporting, adherence to accounting principles, and a productive tool for managing potential financial losses. SAP S4 Hana continues to make strides in pioneering advanced business applications, with the LCM valuation method being a prime example of its commitment to business success.
Join us in enriching our exploration of LCM valuation in SAP S4 Hana by sharing your experiences and insights. We value your expertise and welcome your feedback on implementing this crucial process. Your input will not only enhance the depth of our discussion but also contribute to the broader SAP community's knowledge base. Let's collaborate to unlock new insights and best practices in inventory management together. Together, we can navigate the complexities of LCM valuation with confidence and precision."
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